AMENDMENT TO SECTION 10 OF INCOME TAX ACT 1961 BY FINANCE ACT, 2020

[Mr. M. GOVINDARAJAN]

Introduction

Each year the Finance Act has been enacted which brings many changes, amendments in direct laws, indirect laws and in other aspects.  Finance Act, 2020 has also brought many changes in Income Tax Act, 1961 (‘Act’ for short).  In this article the changes brought down by Finance Act, 2020 in respect of section 10 are to be discussed.  Section 7 of the Finance Act, 2020 has amended in section 10 of the Act.  Section 10 of the Act provides the types of income that do not form part of the total income.

Amendment to section 10(23C)

Section 7(I) of the Finance Act, 2020 substituted the first and second provisos of section 10(23C) of the Act for the new two provisos.   The erstwhile provisions provide the procedure the registration of fund or trust or institution by the proper officer.

Application for new registration

The newly substituted first proviso provides that the exemption already granted to the fund or trust or institution or university or other educational institution or hospital or other medical institution shall not be available unless such fund or trust or institution or university or other educational institution or hospital or other medical institution makes an application in the prescribed form and manner to the Principal Commissioner or Commissioner, for grant of approval. The said proviso came into effect from 01.06.2020. 

1. The above said institutions to whom exemption is granted shall apply for new registration within three months from 01.06.2020.

2. Where such fund or trust or institution or university or other educational institution or hospital or other medical institution is approved and the period of such approval is due to expire, the application for new registration is to be filed at least six months prior to expiry of the said period and got approved.

3. Where such fund or trust or institution or university or other educational institution or hospital or other medical institution has been provisionally approved, the application for new registration is to be filed at least six months prior to expiry of the period of the provisional approval or within six months of commencement of its activities, whichever is earlier and got approved.

4. In any other case, at least one month prior to the commencement of the previous year relevant to the assessment year from which the said approval is sought and got approved.

Approval of the application

The newly substituted second proviso provides the procedure for approval of the application filed for new registration of trust etc., by the Principal Commissioner or Commissioner of Income Tax.

If the application is filed under (i) above, the Principal Commissioner or Commissioner shall pass an order in writing granting approval to it for a period of five years.

If the application is filed under (ii) and (iii) above, the Principal Commissioner or Commissioner shall-

• call for such documents or information from it or make such inquiries as he thinks necessary in order to satisfy himself about-

1. the genuineness of activities of such fund or trust or institution or university or other educational institution or hospital or other medical institution; and
2. the compliance of such requirements of any other law for the time being in force by it as are material for the purpose of achieving its objects; and

•  after satisfying himself about the objects and the genuineness of its activities under item (A), and compliance of the requirements under item (B), -

1. pass an order in writing granting approval to it for a period of five years;
2.  if he is not so satisfied, pass an order in writing rejecting such application and also cancelling its approval after affording it a reasonable opportunity of being heard.

If the application is filed under (iv) above, the Principal Commissioner or Commissioner shall pass an order in writing granting approval to it provisionally for a period of three years from the assessment year from which the registration is sought, and send a copy of such order to the fund or trust or institution or university or other educational institution or hospital or other medical institution.

Application of fund

The third proviso to section 10(23C) provides for the application of funds by the fund, trust etc., and also provides that the fund, trust etc., do not invest its fund other than corpus fund etc.

The Finance Act, 2020 inserted an explanation to the third proviso to section 10(23C) which is in the form of clarification.  The newly inserted explanation provides that the income of the funds or trust or institution or any university or other educational institution or any hospital or other medical institution, shall not include income in the form of voluntary contributions made with a specific direction that they shall form part of the corpus of such fund or trust or institution or any university or other educational institution or any hospital or other medical institution.

Amendment to 8^th and 9^th proviso to section 10 (23C)

The Finance Act, 2020 substituted the 8^th and 9^th provisos of section 10(23C) of the Act.  The newly substituted 8^th proviso provides that any approval granted shall apply in relation to the income of the fund or trust or institution or university or other educational institution or hospital or other medical institution,–

• where the application is made under clause (i) of the first proviso, from the assessment year from which approval was earlier granted to it;
• where the application is made under clause (iii) of the first proviso, from the first of the assessment years for which it was provisionally approved;
•  in any other case, from the assessment year immediately following the financial year in which such application is made.

Such order shall be passed, in such form and manner as may be prescribed, before expiry of the period of three months, six months and one month, respectively, calculated from the end of the month in which the application was received.

Amendment to 10^th proviso

The 10^th proviso to Section 10(23C) provides for the audit of the fund, trusts etc. The amendment requires that the audit under section 44AB of the Act.  After amendment the 10^th proviso to Section 10(23C) provides that where the total income, of the fund or trust or institution or any university or other educational institution or any hospital or other medical institution without giving effect to the required provisions exceeds the maximum amount which is not chargeable to tax in any previous year, such trust or institution or any university or other educational institution or any hospital or other medical institution shall get its accounts audited in respect of that year by an accountant as defined in the Explanation below sub-section (2) of  section 288 before the specified date referred to in section 44AB and furnish by that date, the report of such audit in the prescribed form duly signed and verified by such accountant and setting forth such particulars as may be prescribed.

Application to 12^th proviso

The Finance Act, 2020 amended the 12^th proviso to Section 10(23C) of the Act.  The amended 12^th proviso provides that any amount credited or paid out of income of any fund, trust etc., to any other fund, trust etc., being voluntary contribution made with a specific direction that they shall form part of the corpus, shall not be treated as application of income to the objects for which such fund or trust or institution or university or educational institution or hospital or other medical institution, as the case may be, is established.

Omission of 16^th proviso

The 16^th proviso to section 10(23C) provides that in case the fund or trust or institution or any university or other educational institution or any hospital or other medical institution referred to in the first proviso makes an application on or after the 01.06.2006  for the purposes of grant of exemption or continuance thereof, such application shall be made on or before the 30^th  day of September of the relevant assessment year from which the exemption is sought.

The Finance Act, 2020 omitted this 16^th proviso.

Amendment to 18^th proviso

The Finance Act, 2020 substituted the 18^th proviso to section 10(23C) of the Act.  The newly substituted proviso provides that all applications made under the first proviso as it stood before its amendment by the Finance Act, 2020 pending before the Principal Commissioner or Commissioner, on which no order has been passed before the date on which the first proviso has come into force, shall be deemed to be an application made under clause (iv) of the first proviso on that date. 

Amendment to Section 10(23D)

Chapter XII E of the Act provides special provisions relating to tax on disbursed income to unit holders, interest payable for  non-payment of tax, UTI or mutual fund to be an assessee in default. 

Section 10 (23D) provides that any income of mutual fund shall not form part of total income subject to Chapter XII E.  The Finance Act, 2020 omitted the words ‘subject to Chapter XII E’ from section 10(23D).

Amendment to Section 10(23FC)

Section 10(23FD) provides that any income of a business trust by way of-

• interest received or receivable from a special purpose vehicle; or
• dividend referred to in sub-section (7) of section 115-O

shall not form part of total income. 

The Finance Act, 2020 substituted the words received or receivable from a special purpose vehicle for the words ‘referred to in sub-section (7) of section 115-O’

Amendment to Section 10(23FD)

Section 10(23FD) provides that any distributed income, referred to in section 115UA, received by a unit holder from the business trust, not being that proportion of the income which is of the same nature as the income referred to in sub-clause (a) of clause (23FC) or clause (23FCA) shall not form part of total income.

Finance Act, 2020 substituted the words in sub-clause (a) of clause (23FC) or sub-clause (b) of said clause (in a case where the special purpose vehicle has exercised the option under section 115BAA) for the ‘in sub-clause (a) of clause (23FC)’.

Insertion of new section 10(23FE)

The Finance Act, 2020 inserted a new clause 23FE to section 10.  The newly inserted clause provides that any income of a specified person in the nature of dividend, interest or long-term capital gains arising from an investment made by it in India, whether in the form of debt or share capital or unit, if the investment–

• is made on or after the 1st day of April, 2020 but on or before the 31st day of March, 2024;
• is held for at least three years; and
• is in-

• a business trust referred to in sub-clause (i) of clause (13A) of section 2; or
• a company or enterprise or an entity carrying on the business of developing, or operating and maintaining, or developing, operating and maintaining any infrastructure facility as defined in the Explanation to clause (i) of sub-section (4) of section 80-IA or such other business as the Central Government may, by notification in the Official Gazette, specify in this behalf; or
• a Category-I or Category-II Alternative Investment Fund regulated under the Securities and Exchange Board of India (Alternative Investment Fund) Regulations, 2012 made under the Securities and Exchange Board of India Act, 1992 having 100% investment in one or more of the company or enterprise or entity referred to in item (b).

If any difficulty arises regarding interpretation or implementation of the provisions of this clause, the Board may, with the approval of the Central Government, issue guidelines for the purpose of removing the difficulty.  Every guideline issued under the first proviso, shall be laid before each House of Parliament and shall be binding on the income-tax authority and the specified person.  Where any income has not been included in the total income of the specified person due to the provisions of this clause, and subsequently during any previous year the specified person fails to satisfy any of the conditions of this clause so that the said income would not have been eligible for such non-inclusion, such income shall be chargeable to income-tax as the income of the specified person of that previous year.

The explanation to this clause defines the expression ‘specified person’ as-

• a wholly owned subsidiary of the Abu Dhabi Investment Authority which–

• is a resident of the United Arab Emirates; and
• makes investment, directly or indirectly, out of the fund owned by the Government of the United Arab Emirates;

•  a sovereign wealth fund which satisfies the following conditions-

• it is wholly owned and controlled, directly or indirectly, by the Government of a foreign country;
• it is set up and regulated under the law of such foreign country;
• the earnings of the said fund are credited either to the account of the Government of that foreign country or to any other account designated by that Government so that no portion of the earnings inures any benefit to any private person;
• the asset of the said fund vests in the Government of such foreign country upon dissolution;
•  it does not undertake any commercial activity whether within or outside India; and
• it is specified by the Central Government, by notification in the Official Gazette, for this purpose;

• a pension fund, which-

• is created or established under the law of a foreign country including the laws made by any of its political constituents being a province, state or local body, by whatever name called;
• is not liable to tax in such foreign country;
• satisfies such other conditions as may be prescribed; and
• is specified by the Central Government, by notification in the Official Gazette, for this purpose.

Amendment to section 10(34)

Section 10(34) of the Act provides that any income by way of dividends referred to in section 115-O shall not form part of the total income.  The Finance Act, 2020 inserted a second proviso to this clause.  The newly inserted second proviso provides that nothing contained in this clause shall apply to any income by way of dividend received on or after the 1st day of April, 2020 other than the dividend on which tax under section 115-O and section 115BBDA, wherever applicable, has been paid.

Amendment to section 10(35)

Section 10(35) provides that any income by way of mutual fund, units from the Administrator of the specified undertaking, units from the specified company.

The Finance Act, 2020 inserted a second proviso to this clause which provides that nothing contained in this clause shall apply to any income in respect of units received on or after the 1st day of April, 2020. 

Amendment to section 10(45)

Section 10(45) provides that any allowance or perquisite, as may be notified by the Central Government in the Official Gazette in this behalf, paid to the Chairman or a retired Chairman or any other member or retired member of the Union Public Service Commission shall not form part of the total income.

The Finance Act, 2020 omitted this clause.

Insertion to section 10(48C)

Section 7(III) of the Finance Act, 2020 inserted a new section 10(48C) which provides that any income accruing or arising to the Indian Strategic Petroleum Reserves Limited, being a wholly owned subsidiary of the Oil Industry Development Board under the Ministry of Petroleum and Natural Gas, as a result of arrangement for replenishment of crude oil stored in its storage facility in pursuance of directions of the Central Government in this behalf shall not form part of the total income.

Nothing contained in this clause shall apply to an arrangement, if the crude oil is not replenished in the storage facility within three years from the end of the financial year in which the crude oil was removed from the storage facility for the first time.

Amendment to section 10 (50)

Section 10(50) provides that any income arising from any specified service provided on or after the date on which the provisions of Chapter VIII of the Finance Act, 2016 comes into force shall not form part of the total income.  The Finance Act, 2020 substituted the words comes into force or arising from any e-commerce supply or services made or provided or facilitated on or after the 1st day of April, 2021 for the words ‘comes into force.

Conclusion

The amendments brought by the Finance Act, 2020 in respect of Section 10 of the Act which deals with the types of incomes that are not formed part of the total income.  There are major changes from Section 10(23C) to Section 10(50).  The assessees shall take note of the said amendments for their tax planning.